You may be able to keep a vehicle you thought you couldn’t afford to pay for. Chapter 13 allows you to pay less per month and less overall on a vehicle loan, under certain conditions.
This blog is one of a series on the mistakes people make before seeing an attorney about filing bankruptcy. As I’ve said before, these decisions made often seem sensible from a certain angle. But they almost always reflect a lack of knowledge of all the options.
If you need a vehicle but can’t afford the monthly payments, or especially if you have already fallen behind, you probably figure that you don’t have much choice. You know the contract requires you to make the payments or you lose the vehicle. You may have been struggling for months to keep the payments current, putting up with last fees and constant notices or phone calls from the creditor threatening repossession. You might even be looking for a cheap replacement vehicle, maybe even looking forward to letting the vehicle go and getting out from under the debt. That’s especially true if the vehicle is worth less than the loan amount.
You might possible have heard that a bankruptcy can’t help much, at least for hanging onto the vehicle—that you still have to either make the payments, and catch up if you’re behind, or else lose the vehicle. True, in a “straight bankruptcy,” a Chapter 7.
But not necessarily true in a Chapter 13 case. If you meet two main conditions, you can do a “cramdown” on the vehicle loan: lower your payments and likely pay less overall for the vehicle. You may well also be able to lower your interest rate.
The two conditions to be able to do a “cramdown”:
1) Your vehicle loan was entered into more than 910 days before the Chapter 13 case is filed (that’s just about two and a half years); and
2) At the time your case is filed, t he value of your vehicle is less than the balance on your loan.
If your vehicle loan meets these two conditions, we can essentially re-write your loan. We can reduce the total amount you must pay down to the value of the vehicle, “cramming it down” to that lower amount. That’s called the “secured portion” of the debt. We then calculate a new monthly payment—the amount needed to pay off that smaller balance, often at a lower interest rate, and often on a longer remaining term, resulting often in a radically reduced monthly payment. That just becomes part of your Chapter 13 Plan payment.
What happens to the “unsecured portion”—the part of the debt beyond the value of the vehicle? It gets lumped in with the rest of your unsecured debts, usually not requiring you to pay anything more to all your unsecured creditors regardless of your vehicle loan.
And what if you’re behind on your vehicle loan at the time you file your Chapter 13 case—when do you have to pay that arrearage? You don’t. It’s just part of the re-written, new “crammed down” obligation.
So you can see that you might NOT want to surrender a vehicle or allow it to be repossessed if instead you could keep that vehicle while immediately having it cost you much less per month, and likely also cost you much less to pay off. Often, having a reliable vehicle is essential to achieving a successful re-start of your financial life. Before you lose that essential part of your financial plan, come see me to find out your options.